Just like experts are a recurring theme on this blog, it seems that project monitoring is too, as I have considered the judgment in Bank of Ireland v Watts Group plc, looked at the judgment in Bank of Ireland v Faithful & Gould Ltd and I have also discussed the judgment in Lloyds Bank plc v McBains Cooper Consulting Ltd.
I’m back looking at Lloyds Bank plc v McBains Cooper Consulting Ltd this week, as the case has been before the Court of Appeal. It is quite a tough one because the original judgment was long and complex (I called it a “monster judgment” at the time), and much of the appeal turns on the facts (which won’t necessarily be of interest). However, here goes.
Lloyds Bank plc v McBains Cooper Consulting Ltd
Briefly, the facts are as follows:
- Lloyds lent the borrower £2.625 million to assist with the development of a building in Willesden. The main contact at the bank was Mr Mannering.
- Lloyds appointed McBains Cooper as the project monitoring surveyor (PMS).
- Construction works started in late summer 2007, but things didn’t go to plan. By March 2009 the Lloyds’ facility was almost extinguished and the works were far from complete. The shortfall was some £700,000. Lloyds cut its losses and realised its securities in the form of charges over the development property and two other properties.
- Lloyds claimed losses of £1.4 million from McBains Cooper, being the total sums advanced under the facility, less the recoveries from the various charged properties.
- Lloyds alleged that McBains Cooper was not just negligent, but that it was reckless as its PMS had only visited site on around three occasions over 18 months, rather than once each month when preparing his progress reports as required under McBains Cooper’s retainer.
At trial, it became apparent that there was an issue over the level of the facility. The PMS initially proceeded on the basis that the facility was £2.25 million, and not £2.625 million (the bank had not provided McBains Cooper with a copy of the facility letter). Also, no account had been taken of interest that would have to be deducted from the facility, no allowance had been made for professional fees and the contingency was inadequate.
Edwards-Stuart J concluded that McBains Cooper was negligent, but he also found that the bank was contributory negligent and it had to bear one third of the losses.
Court of Appeal
McBains Cooper had six grounds of appeal, including that:
- Its business was the giving of information not advice and so, according to SAAMCO and Hughes-Holland v BPE Solicitors, the scope of its duty was to provide the correct information and it should only be liable for the consequences of that information being wrong (ground 1).
- It was not within the scope of its duty to be responsible for sums advanced from progress report 14 onwards (ground 2).
- The bank’s losses would have been incurred in any event because the project was always a loss making project (ground 3a).
- The assessment of contributory negligence at one-third did not reflect the fact that Mr Mannering knew at the outset that there was a likely shortfall of £200,000 and that the loan should never have been made and that he had deliberately concealed matters from the bank’s credit committee (ground 6).
With regard to the first ground of appeal, Longmore LJ reminded us of what Lord Sumption had to say about the labels of advice and information, and that they are:
“… neither distinct nor mutually exclusive categories. Information given by a professional man to his client is usually a specific form of advice, and most advice will involve conveying information. Neither label really corresponds to the contents of the bottle.”
With regard to the second ground, Longmore LJ concluded that McBains Cooper:
- Negligently failed to draw the bank’s attention to the fact that it was being asked to pay for work done outside the building contract and thus outside the terms of the facility.
- Ought to have informed the bank of this, since it was recommending payment in circumstances when the bank was not bound to make payment at all.
- Was responsible for the negligently wrong information and/or recommendation.
- Was liable to the bank for the sums wrongly paid.
However, Longmore LJ also noted that, at first instance, the court had only taken into account one of the bank’s failings when apportioning responsibility for the losses. This “considerably downplay[ed] the bank’s responsibility” as there was a comprehensive list of actual failings, including that:
- The bank made a loan for a project when it knew from the start that the cost of the project exceeded the amount of the loan of £2.625 million. The loan should never have been made.
- It did not provide McBains Cooper with a copy of the facility letter nor inform it that the facility had been increased from an original proposal of £2.25 million to £2.625 million.
- It allowed the borrower to reduce the amount of security to an inadequate amount.
Longmore LJ described this as:
“… a formidable catalogue of irresponsibility which the judge appears to have regarded as comparatively insignificant.”
He went on:
“No doubt a project monitor’s task may, to some extent, be to protect the bank from failings of its own as well as to ensure the smoothness of the building project; nevertheless any project monitor has a right to expect that a bank will adhere to elementary banking principles which, on this occasion, the bank did not do.”
Consequently, the court reversed the apportionment and found that the bank was two thirds responsible for its own losses.
I wonder if this type of project monitoring case may well be a thing of the past as banks have tightened up their lending criteria following some of the toxic developments that emerged from the 2007/2008 financial crisis. That said, the “experts” thought financial crashes were a thing of the past until US homeowners started defaulting on subprime mortgages.
As I said last time, any surveyor contemplating acting as a PMS should read this case and be watchful of the type of problems that occurred. My advice would be as follows:
- Always read and understand the retainer upon which you are instructed. Don’t simply throw it in a drawer and monitor the project as you would normally do. For example, in this case the retainer provided for McBains Cooper to carry out its own valuation of the construction works in progress each month, and not just check the sums applied for by the borrower.
- Always obtain a copy of the facility letter and ensure that you understand exactly what is and is not included in the facility. If in doubt, ask the lender.
- Always visit site at the frequency required by the retainer.
- While templates are always useful when reporting on progress, over-reliance and a lack of care can lead to incorrect statements being made, such as there being sufficient funds to complete a development when that is quite clearly not the case.
- Ensure that you don’t include sums in draw-downs that are not included in the facility without first seeking prior approval from the lender.
- If you need to warn the lender about issues such as cost overruns, highlight it. If it is not acknowledged by the lender, follow up with another letter or an email, just to be sure the lender has understood.